Rebuilding fiscal justice: a Zakat-based alternative to Pakistan’s tax trap

Pakistan’s tax system has been a constant source of public frustration. Governments come and go, each promising to widen the tax base, reduce fiscal gaps and improve the allocation of public resources. Yet many underlying challenges remain: limited compliance, reliance on indirect taxation, tax expenditures and exemptions, and persistent questions about whether the benefits of taxation are reaching citizens equitably.

The problem is not simply administrative. It also concerns the relationship between taxation, public trust and social responsibility. For households already struggling with high living costs, taxes can feel like an additional burden. At the same time, concerns about exemptions, informal economic activity and unequal compliance continue to shape public perceptions of the tax system.

This raises a broader question: can Pakistan complement conventional fiscal reforms with institutions rooted in its own social and religious traditions?

A Zakat-based social-financing framework, built around transparency, accountability and clearly defined welfare objectives, could provide an additional mechanism for supporting vulnerable households. Rather than replacing taxation, it could complement the existing fiscal and social-protection architecture and contribute more systematically to poverty reduction and inclusive development.

Official data illustrates both progress and continuing challenges in Pakistan’s tax system. The Federal Board of Revenue reported 5.9 million income-tax returns for the Tax Year 2025 by October 31, 2025, compared with five million during the corresponding period a year earlier. While this represents an increase in filing, the scale of the formal tax base remains a major policy issue in a country of more than 240 million people.

Pakistan also relies substantially on consumption-based taxation and withholding mechanisms. These instruments can be easier to collect, but consumption taxes can place a disproportionate burden on households because they are embedded in the prices of goods and services.

The issue, therefore, is not simply how much revenue the state collects. It is also about the structure of revenue collection, the distribution of the burden and citizens’ confidence that public resources are being used effectively.

This is where Zakat becomes relevant. Pakistan already has an institutional framework for Zakat. The State Bank of Pakistan facilitates statutory Zakat deductions from eligible savings and profit-and-loss-sharing accounts. For the 1446–47 AH Zakat year, the notified Nisab for applicable bank accounts was Rs503,529.

The challenge is not the complete absence of a Zakat system. The more important question is whether this existing mechanism can be modernised, strengthened and better connected with wider social-protection objectives.

Zakat is one of the five pillars of Islam and represents an established mechanism of wealth redistribution. Under Islamic principles, Zakat applies to specified forms of wealth subject to conditions including the applicable Nisab and holding period. The Qur’an identifies eight categories of eligible recipients in Surah Al-Tawbah (9:60), including the poor, the needy and those in debt.

Unlike consumption taxation, Zakat has a defined redistributive and welfare purpose. Conventional taxation finances the broad responsibilities of the state, including infrastructure, education, healthcare, administration and other public services. Zakat, by contrast, has a more specific social purpose and can potentially contribute to poverty reduction, livelihood support and assistance to vulnerable communities.

For this reason, Zakat should not simply be treated as another form of government revenue. Any attempt to strengthen its role would require clear legal boundaries, Shariah compliance, independent oversight and safeguards to ensure that funds remain within their legitimate purposes.

Other Muslim-majority countries provide useful examples of institutionalising Zakat. Malaysia has developed organised Zakat institutions operating through state-level structures, while Indonesia has established BAZNAS as a national Zakat management institution. These experiences show that religious giving can be supported by professional administration, digital systems, institutional governance and reporting mechanisms.

Research examining Zakat institutions in Malaysia and Indonesia found measurable institutional efficiency. One study covering 14 institutions during 2016–2020 reported an average efficiency score of around 78%. This should not be interpreted as a current efficiency rate for all Zakat institutions, but it demonstrates that Zakat administration can be evaluated using modern institutional and economic tools.

Pakistan already has a functioning Zakat architecture. The Punjab Zakat and Ushr Department, for example, administers programmes including Zakat Rashan Cards, education stipends and marriage assistance. It reported an allocation of Rs8.252 billion for interventions during FY2025–26, alongside budgeting, accounting and auditing arrangements.

These developments suggest that Pakistan does not need to build a Zakat system from scratch. The opportunity lies in strengthening what already exists.

The central issue is institutional trust. Citizens need confidence that Zakat collected through formal channels reaches eligible beneficiaries efficiently, transparently and without political interference.

The economic potential of Zakat deserves more systematic research. Rather than relying on broad estimates, Pakistan should undertake a transparent national assessment based on household wealth, financial assets, business inventories and other Zakatable assets, while accounting for relevant Islamic rules and exemptions.

Such research could establish the realistic size of the Zakat pool and provide policymakers with evidence rather than speculative estimates.

Zakat does not necessarily have to compete with the tax system. It could complement social-protection spending by supporting households facing poverty, food insecurity, healthcare costs, educational expenses and livelihood constraints.

Pakistan’s federal social-protection system is already substantial. The FY2026–27 federal budget provides Rs838 billion for the Benazir Income Support Programme. The policy challenge is therefore to coordinate different sources of social financing rather than duplicate them.

A workable modern Zakat framework could focus on six areas.

First, strengthen institutional governance through professional capacity, clear performance indicators and greater operational transparency.

Second, expand digital collection and administration through secure platforms that improve records and facilitate voluntary contributions.

Third, strengthen auditing and public disclosure through independent audits, accessible financial statements and outcome-based reporting.

Fourth, improve coordination with social-protection programmes while respecting the distinct legal and religious requirements governing Zakat.

Fifth, develop credible beneficiary-identification systems. Digital databases could help identify vulnerable households, provided that privacy, eligibility and data-security safeguards are maintained.

Sixth, encourage research and evaluation as universities, economists, Islamic scholars and policymakers should work together to measure the poverty-reduction and livelihood effects of Zakat programmes.

A Zakat-based approach should not be presented as a simple substitute for Pakistan’s tax system. The state still requires broad-based taxation to finance public goods and services that Zakat is not designed to finance.

Instead, Pakistan could explore a complementary model in which Zakat becomes a stronger component of the country’s social-financing architecture.

This could begin through carefully designed provincial pilots testing digital collection, beneficiary identification, auditing, transparency and measurable welfare outcomes before wider expansion.

The government could also establish a national research initiative to estimate Pakistan’s Zakat potential using transparent and independently verifiable methodology. Public awareness campaigns could explain the difference between Zakat, taxation and voluntary charity, while showing citizens how contributions are collected, distributed and audited.

Pakistan’s fiscal challenge cannot be solved by a single instrument. Tax reform, expenditure reform, improved compliance, stronger institutions and effective social protection all have roles to play. Zakat should therefore be considered not as a replacement for the state’s fiscal system, but as a potential additional pillar of social financing rooted in Pakistan’s own religious and social traditions.

The real opportunity lies in connecting moral responsibility with institutional accountability. If Zakat collection becomes more transparent, professionally managed and linked to measurable poverty-reduction outcomes, it could make a larger contribution to human development.

The question is not simply whether Pakistan should replace taxation with Zakat. It is whether the country can build a framework in which taxation, Zakat and other forms of social finance operate within clearly defined roles, with transparency, accountability and human dignity at the centre.